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Commissioner Of Income-Tax v. Aminchand Payarelal Ltd.

Calcutta High Court

May 3, 1989

Judgment

CaseIQ

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Factual and Procedural Background

This reference under section 256(2) of the Income-tax Act, 1961, raises two questions of law for the assessment year 1967–68 concerning levy of penalty under section 271(1)(a) and the assessee's obligation to file a return in view of a notice under section 139(2).

Key factual and procedural milestones stated in the opinion:

The return for the relevant assessment year was due under section 139(1) on or before 30 September 1967, but no return was filed by that date.
A notice under section 139(2) was served on the assessee on 27 July 1967, asking it to file the return within 30 days.
The assessee ultimately filed a return on 17 June 1969 declaring a loss of Rs. 29,008.
The assessment was initially made on an income of Rs. 2,15,415; after revision under section 264 the total income was determined at Rs. 1,19,319 (which was accepted by the assessee).
On 5 February 1968 a notice under section 274 read with section 271 was issued asking why penalty under section 271(1)(a) should not be levied.
The Income-tax Officer imposed penalty for nine months' delay; the Appellate Assistant Commissioner sustained the levy (while directing recomputation according to any relief under section 264); the Tribunal cancelled the penalty, finding the assessee had acted bona fide.
The reference to this Court raises whether the Tribunal was right to cancel the penalty and whether the Tribunal misdirected itself about the assessee's obligation to file in view of the section 139(2) notice.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that this is not a fit case for levy of penalty under section 271(1)(a) of the Income-tax Act, 1961, and cancelling the penalty levied by the Income-tax Officer under section 271(1)(a)?
Whether, on the facts and in the circumstances of the case and, in view of the fact that notice under section 139(2) has been served on the assessee, the Tribunal misdirected itself in law in holding that the assessee had no obligation to file the return inasmuch as it bona fide believed that its total income will be less than the maximum not chargeable to tax?

Arguments of the Parties

Revenue / Commissioner

Contended that the Tribunal was not justified in holding that no penalty was imposable merely because the assessee had suffered loss and filed a loss return.
Argued that the Tribunal considered default under section 139(1) but failed to take note of the default under section 139(2), noting that the lower authorities had proceeded on both defaults.
Relied on orders of the lower authorities (Income-tax Officer and Appellate Assistant Commissioner) in support of levy of penalty.

Assessee / Dr. Pal (Counsel for Assessee)

Contended the assessee acted bona fide in not filing the voluntary return under section 139(1) because its accounts showed a loss.
Argued that no contention was raised before the Tribunal regarding non-compliance with the notice under section 139(2), and therefore the second question should not be decided by this Court (seeking remand if necessary).
Raised that interest had been levied and, relying on the Supreme Court decision in C.I.T. v. M. Chandra Sekhar, submitted that where interest was charged the delay had been condoned and penalty could not be levied.
Relied on the Bombay High Court decision in Commissioner Of Income-Tax, Bombay City-II v. Allied Silk Mills to support the submission that a bona fide return showing non-taxable income would preclude penalty.
Before lower authorities the assessee also contended that a return filed under section 139(4) (a belated return) should be treated as if filed within time for the purpose of avoiding penalty.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
T. Venkata Krishnaiah and Co. v. CIT, [1974] 93 ITR 297 (Andhra Pradesh High Court)	Invoked by the Appellate Assistant Commissioner in rejecting the contention that interest levy precludes imposition of penalty.	The Court records that the Appellate Assistant Commissioner relied on this decision to reject the assessee's contention; the present Court does not expressly adopt or distinguish the decision but notes the lower authority's reliance on it.
CIT v. N. Khan and Brothers, [1973] 92 ITR 338 (Allahabad High Court)	Principle that when a person believes in good faith that his income is below the taxable limit he is guided by that belief for the duty to file a voluntary return (bona fide belief principle).	The Tribunal relied on this authority to hold that a bona fide belief based on accounts may exempt an assessee from penalty under section 271(1)(a). The Court accepted the principle in principle but held it was academic here because of the separate obligation arising from the service of a section 139(2) notice, and observed the Tribunal was silent on reasonable cause for default under section 139(2).
Commissioner Of Income-Tax, Bombay City-II v. Allied Silk Mills, [1983] 140 ITR 428 (Bombay High Court)	Holds that if an assessee files a bona fide return showing income below the taxable limit the question of imposition of penalty may not arise; the question of bona fides is one of fact for the Tribunal.	The Court noted the Allied Silk Mills decision relied upon by the assessee. It observed that, despite that authority, the assessee in the present case ought to have complied with the specific statutory notice under section 139(2) and given no explanation for failing to do so; the Court treated Allied Silk Mills as distinguishable on the ground of non-compliance with the notice.
CIT v. M. Chandra Sekhar, [1985] 151 ITR 433 (Supreme Court)	Relied upon by the assessee to contend that where interest has been charged for delay, penalty should not be imposed (condonation effect of charging interest).	The Court refused to entertain this contention because (a) there was no material before the Court to show that interest had in fact been charged, and (b) the contention was not raised before the Tribunal (and, in any event, was rejected by the Appellate Assistant Commissioner).

Court's Reasoning and Analysis

The Court proceeded in a structured manner to examine both the procedural posture and the legal principles invoked by the parties. The principal strands of its reasoning, as stated in the opinion, are:

The Tribunal's procedural finding that no argument was canvassed before it on the question of levy of penalty for default under section 139(2) was incorrect. The lower authorities had considered default under both sections 139(1) and 139(2), and the Revenue's reliance on those orders before the Tribunal meant the contention had in fact been raised.
On section 139(1): the Court accepted the legal proposition (as applied by the Tribunal) that the duty to file a voluntary return under section 139(1) depends on the income which the assessee believes to be his income (i.e., bona fide belief), not merely the income finally assessed. Whether that belief is bona fide is essentially a question of fact. The Court emphasised that accounting loss alone does not automatically establish a bona fide belief that no taxable income exists because tax treatment may differ from accounting treatment.
However, the Court regarded the question of default under section 139(1) as largely academic in this case because a notice under section 139(2) was served on the assessee on 27 July 1967, before expiry of the period under section 139(1). The service of the section 139(2) notice imposed a separate statutory obligation to file within the time specified in the notice. The time allowed under the notice expired before the end of August 1967, and the assessee did not comply and offered no reasonable cause for the default.
The onus to show that the assessee was prevented by sufficient cause from filing within the time specified lies on the assessee. The Tribunal was silent on whether the assessee had reasonable cause for failing to comply with the section 139(2) notice, and this omission was material.
The Court considered the authorities relied upon by the assessee (including Allied Silk Mills and CIT v. N. Khan) but distinguished them on the facts. While the bona fide belief principle is acknowledged, it does not absolve an assessee of the statutory duty to comply with a section 139(2) notice nor relieve the assessee of the burden of showing reasonable cause for delay in complying with such a notice.
The contention that interest had been charged and therefore penalty could not be levied (relying on the Supreme Court in M. Chandra Sekhar) was not entertained: there was no material before the Court showing interest was charged, the point had been rejected by the Appellate Assistant Commissioner, and in any case the contention was not raised before the Tribunal (so could be deemed rejected by the Tribunal).
On the totality of the findings and the absence of any explanation or reasonable cause for failure to comply with the section 139(2) notice, the Court concluded that the Tribunal was not justified in cancelling the penalty.

Holding and Implications

Holding: The Court answered the first question in the negative and in favour of the Revenue, and answered the second question in the affirmative and in favour of the Revenue.

Immediate consequences and direct effects on the parties (as stated in the opinion):

The Tribunal's order cancelling the penalty under section 271(1)(a) was held to be incorrect.
The assessee's plea that it had no obligation to file in view of a bona fide belief of non-taxability was rejected insofar as it failed to comply with the notice under section 139(2) and did not show reasonable cause for that failure.
No order as to costs was made by the Court. The Court granted leave to file vakalatnama within two weeks.

The opinion focuses on the resolution of the referenced questions as between the parties. It does not purport in express terms to lay down any broader rule beyond application of the stated principles to the facts before the Court.

Show all summary ...

The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— In this reference, under section 256(2) of the Income-tax Act, 1961, the following questions of law for the assessment year 1967–68, have been referred in this court:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that this is not a fit case for levy of penalty under section 271(1)(a) of the Income-tax Act, 1961, and, in that view, cancelling the penalty levied by the Income-tax Officer under section 271(1)(a) of the Income-tax Act, 1961?

2. Whether, on the facts and in the circumstances of the case and, in view of the fact that notice under section 139(2) has been served on the assessee, the Tribunal misdirected itself in law in holding that the assessee had no obligation to file the return inasmuch as it bona fide believed that its total income will be less than the maximum not chargeable to tax?”

2. The facts shortly stated are that the return of income of the assessee for the assessment year under reference was due under section 139(1) of the Act on or before September 30, 1967. The assessee did not file any return by the due date. A notice under section 139(2) was served upon the assessee on July 27, 1967, asking it to file the return within 30 days of the date of service of the notice. The assessee filed the return on June 17, 1969, declaring a loss of Rs. 29,008. The assessment was, however, made on an income of Rs. 2,15,415. After the revision made by the Commissioner of Income-tax under section 264 of the Act, the total income was determined at Rs. 1,19,319. A notice under section 274 read with section 271 was issued to the assessee on February 5, 1968, asking the assessee to show cause why penalty under section 271(1)(a) should not be levied on it.

3. Before the Income-tax Officer, the only contention raised by the asses-see was that even though it did not apply for extension of time, the return filed by it under section 139(4) should be) deemed to have been filed within time and, therefore, no penalty should be levied. The Income-tax Officer held as follows:

“I have carefully considered the facts of the case. What is material in this context is whether the assessee was prevented by sufficient cause from filing the return within the time allowed by sections 139(1) and 139(2). The assessee had not shown any cause to justify or which prevented him from filing the return. I am satisfied that the assessee was not prevented by sufficient cause from filing the return within the time allowed by sections 139(1) and 139(2) and thereby rendered itself liable to penalty under section 271(1)(a)”

4. He, therefore, imposed penalty for nine months' delay. The matter was taken up before the Appellate Assistant Commissioner. On appeal, several contentions were raised by the assessee. One of such contentions was that since interest was levied under section 139(1)(iii), no penalty could be imposed. This contention was rejected by the Appellate Assistant Commissioner in view of the decision of the Andhra Pradesh High Court in T. Venkata Krishnaiah and Co. v. CIT, [1974] 93 ITR 297. The Appellate Assistant Commissioner held that the assessee, though it had taxable income, failed to file its return of income within the time allowed under section 139(1) and in the notice under section 139(2) without any reasonable cause and, therefore, the penalty was rightly levied. He, however, directed the Income-tax Officer to recompute the penalty on the basis of the total income of the assessee that might be arrived at after giving effect to any relief if granted by the Commissioner of Income-tax on the assessee's petition under section 264 of the Act.

5. On further appeal by the assessee before the Tribunal, the Tribunal recorded as follows:

“The Revenue relied upon the orders of the authorities below for the levy of penalty whereas the assessee's counsel stated that, on the facts of the case, no penalty should be levied as, on the basis of the accounts, the assessee suffered loss.”

6. The Tribunal came to the following conclusion:

“It is not necessary for us to pass an elaborate order. There is no suggestion that there was a mala fide indention of the assessee when its income was finally assessed at Rs. 1,19,319. On the basis of the accounts, the assessee had suffered loss. The assessee could not anticipate that its income would be assessed at such a figure. There is a direct authority, in favour of the assessee on this point, of the Allahabad High Court in the case of CIT v. N. Khan and Brothers, [1973] 92 ITR 338. In that case, the assessee did not file a voluntary return when there was a net loss of Rs. 9,214. The return was not accepted and the income was assessed at Rs. 64,922 which included a sum of Rs. 40,000 as income from undisclosed sources, being the aggregate of three cash credits. Their Lordships of the Allahabad High Court stated that it is true that, under section 139(1), a duty is cast upon every person to file a voluntary return if his income exceeds the maximum amount which is not chargeable to income-tax. The learned judge of the High Court stated that the question arises as to which income is contemplated by this provision, the income which the assessee believes to be his income or income which is finally assessed by the Income-tax Officer. Having found that, when a person is required to file a voluntary return and no assessment has yet been made against him, in such circumstances, he is guided by what he himself believes to be his income. Thus, their Lordships held that when a person considers an income to be his income which is not chargeable to income-tax, he is not required to file a voluntary return if the income finally assessed, is more than the maximum amount which is not chargeable to income-tax. In this case, there is no suggestion by the Revenue that the belief of the assessee was not a bona fide one. Thus, when there is nothing to hold that the assessee could anticipate that its income would be pitched up to a higher figure, we cannot hold that the assessee had no reasonable cause for not submitting the return in time in terms of section 139(1) of the Act because the obligation to file the return under section 139(1) arises only when the income exceeds the maximum amount which is not chargeable to tax on the basis of the return. Hence, we are of the opinion that this is not a fit case for levy of penalty under section 271(1)(a) of the Act. Hence, we cancel the levy of penalty.”

7. At the hearing, it was contended on behalf of the Commissioner that the Tribunal was not justified in holding that no penalty was imposable in this case as the assessee has suffered loss and filed a loss return. It is also contended that the Tribunal only considered the default under section 139(1), but failed to take note of the default committed under section 139(2).

8. It is contended by Dr. Pal that the assessee had acted bona fide in not filing the return under section 139(1) as it had suffered loss according to its accounts. He further contended that before the Tribunal, no contention was raised about non-compliance with the notice under section 139(2) and, accordingly, the second question which has been referred to this court cannot be decided in this reference and the matter should be remanded to the Tribunal for fresh disposal, if at all, in the event the court is inclined to hold that there was non-Compliance with the notice issued under section 139(2). Dr. Pal has also contended that since interest was charged, no penalty could be levied in view of the judgment of the Supreme Court in CIT v. M. Chandra Sekhar, [1985] 151 ITR 433.

9. Dr. Pal has relied on the decision of the Bombay High Court in Commissioner Of Income-Tax, Bombay City-Ii v. Allied Silk Mills., [1983] 140 ITR 428. In; that case, pursuant; to the notice under section 22(2) of the Indian Income-tax Act, 1922, calling upon the assessee-firm to file its return in respect of the assessment year 1961–62, the assessee did not file its return within the time specified by the said notice. He filed the return after a delay of one year and 11 days. In the said return, the assessee-firm showed its income below the minimum taxable income for firms. Thereafter, penalty proceedings were initiated for delay in filing the return under section 22(2) of the Indian Income-tax Act. Ultimately, the matter came up before the Bombay High Court on reference. There, the Bombay High Court observed as follows (at p. 433):

“In this case, admittedly, the income disclosed by the assessee-firm in its return, namely, Rs. 21,219, was below the limit of the taxable income for the firm. The only question that would, therefore, survive for consideration would be whether such disclosure of income by the assessee could be considered to be bona fide. The question whether such disclosure was bona fide or not was a question of fact and was primarily for the Tribunal to decide.”

10. Dr. Pal contends that the Tribunal has found that the assessee acted bona fide and, accordingly, this fact having not been disputed by the Revenue, there cannot be any ground for interference by this court.

11. We shall first dispose of the objection taken by Dr. Pal that the issue involved in the second question relating to the non-compliance with the notice under section 139(2) and imposition of penalty in consequence thereof, does not arise out of the order of the Tribunal. The Tribunal, in rejecting the reference application on the second question in this reference which was the fourth question in the reference application under section 256(1), observed as follows:

“No arguments were also canvassed by the Department before the Tribunal with regard to question No. 4 in the assessee's appeal and thus the quesiton as framed by the applicant does not arise out of the order of the Tribunal.”

12. In our view, the Tribunal was not justified in stating that no argument was canvassed on the question of levy of penalty for default under section 139(2) of the Act. We have already set out the findings of the Income-tax Officer and the Appellate Assistant Commissioner. They proceeded to consider the default of the assessee not only under section 139(1), but under section 139(2) as well. Apart from mentioning in the appellate order that “the Revenue relied upon the orders of the authority below for the levy of penalty”, no further argument was recorded by the Tribunal. When the orders of the lower authority specifically recorded the grounds on which the penalty was levied and sustained and when the Revenue relied on those orders in support of its contention as recorded by the Tribunal, it must be held that the Revenue must have raised this contention and supported the reasonings and conclusion of the lower authorities before the Tribunal. That is presumably the reason why the Tribunal, in paragraph 5 of the appellate order, stated that “it was not necessary to pass an elaborate order”. We have already extracted the material part of the order of the Tribunal. We, therefore, reject the contention of Dr. Pal that the second question does not arise out of the order of the Tribunal.

13. We shall now deal with the merits of the contentions.

14. Section 139(1) of the Act provides that an assessee has to file a return within the time prescribed therein if his total income during the relevant previous year exceeded the maximum amount which is not chargeable to income-tax. In this case, the contention of the assessee was that as it had suffered loss and also ultimately filed a loss return and, accordingly, there is justification for not filing the return within the time specified under section 139(1). The income contemplated under section 139(1) which imposes a duty on a person to file a voluntary return is the income which the assessee believes to be his income and not the income which is finally assessed. In such a case, if what the assessee considers to be his income is less than the maximum not chargeable to tax, he is not required to file a voluntary return. Even if, ultimately, his income is assessed at a figure which is taxable, he may not be liable for penalty under section 271(1)(a). To that extent, the Tribunal is right in principle. The holding of a bona fide belief of an assessee that his income is less than the maximum not chargable to tax is essentially a question of fact. Merely because the accounts disclosed a loss, it could not be a bona fide ground for not filing a return under section 139(1). According to accountancy principles, there may not be profit/but from the point of view of taxation, there may be profit having regard to the exclusion or inclusion of certain items of income and expenditure. In this case, the assessment was ultimately made on Rs. 1,19,319 which was accepted by the assessee as against the loss of Rs. 29,008. How the loss was arrived at and how the ultimate income came to be determined are relevant factors which indicate whether the assessee held the belief in good faith that no return was required to be filed voluntarily under section 139(1). This fact cannot be lost sight of. In the instant case, however, the question of default under section 139(1) is only academic having regard to the fact that, before the expiry of the period prescribed under section (139(1), i.e, September 30, 1967, notice under section 139(2) was served upon the assessee on July 27, 1967. Time to file the return under section 139(2) expired before the end of August, 1967. The period of default under section 139(1) comes to an end as soon as the notice under section, 139(2) is served. The fact that although the period prescribed by notice under section 139(2) had expired, the time allowed for furnishing a voluntary return under section 139(1) had not expired is not by itself a reasonable cause for not furnishing the return. The onus is on the assessed to show that he was prevented by sufficient cause in not complying with the statutory requirement of filing the return in time. The Tribunal was silent on the question whether the assessee had any reasonable cause for not filing the return.

15. In Allied Silk Mills case, [1983] 140 ITR 428, the Bombay High Court held that since the assessee had filed his return bona fide, showing nontaxable income, the question of imposition of any penalty would not arise. The assessee, in our view, ought to have filed a return even if it had suffered loss in response to the notice unde section 139(2). But that was not done. It is not a case where the assessee did not file any return at all. A return was filed before the assessment was made. No explanation has been given as to why the return could not be filed within the time specified under section 139(2). The question is of reasonable delay in filing the return but no reasonable cause was shown. If the ground is that no return is liable to be filed because there is a loss, in that event, the filing of the return before the assessment is made would indicate that the assessee knew that it was required to file the return even if there is a loss for the purpose of determination and carry forward of the loss, if any.

16. In our view, simply because there is a loss according to the accounts, the assessee is not absolved of the obligation of filing a return in response to section 139(2). The assessee has an obligation to comply with the direction contained in the notice under section 139(2) even if it had suffered loss. It could have filed the return along with the balance-sheet and profit and loss account showing the loss allegedly suffered. That was not done.

17. If the assessee had no obligation to comply With the notice under section 139(2), in that event, the assessee would be precluded from claiming carry forward of loss by filing a return beyond time. In this case, not only was the assessee's negative income of Rs. 29,008 determined as a positive income of Rs. 2,15,415, but the assessee also made an application under section 264 of the Act before the Commissioner of Income-tax for revision and the total income was determined at Rs. 1,19,319 which was accepted by the assessee. In that view of the matter, it cannot be said that there could be any reasonable ground to sustain the plea that income would never exceed the taxable limit and there would be no assessable income. On the contrary, the plea taken before the Appellate Assistant Commissioner was that the assessee did not apply for extension of time because the return filed by it under section 139(4) should have been treated as a return filed within time and, therefore, no penalty, could be levied. The mere fact that an outer limit is fixed by section 139(4) enabling an assessee to file a belated return and the fact of filing a return under section 139(4) would not by itself affect the power of the Income-tax Officer to impose penalty under section 271(1)(a) particularly when the notice under section 139(2) is not complied with.

18. In our view, once a notice under section 139(2) is served on the assessee, there is an obligation to file the return in pursuance of such notice irrespective of the fact whether it has positive or negative income and the assessee must satisfy the Income-tax Officer that there was a reasonable ground for delay in complying with the said notice.

19. Dr. Pal has contended that, in view of the decision of the Supreme Court in M. Chandra Sekhar's case, [1985] 151 ITR 433, since, in this case, interest was charged, the delay in the filing of the return has been condoned. We are afraid that we cannot allow Dr. Pal to raise this contention for more than one reason.

20. Firstly, there is no material before us to hold that interest was in fact charged. Secondly, this specific contention was raised before the Appellate Assistant Commissioner and he rejected that contention. No such contention was raised before the Tribunal. Even assuming such contention was raised, it must be deemed to have been rejected by the Tribunal. The assessee has not come against the said order of the Tribunal by way of reference.

21. For the reasons aforesaid, we answer the first question in the negative and in favour of the Revenue. The second question is answered in the affirmative and in favour of the Revenue.

22. There will be no order as to costs. Leave is given to file vakalatnama within two weeks.

Bhagabati Prasad Banerjee, J.:— I agree.